The Dynamics of Related

Diversification
The Retail Initiatives in Petroleum
Limited
Case study
Reference no 307-200-1

This case was written by Professor Ashok K Sar, IBAT School of Management. It is
intended to be used as the basis for class discussion rather than to illustrate
either effective or ineffective handling of a management situation. The case was
compiled from generalised experience.

© 2007, IBAT School of Management.

No part of this publication may be copied, stored, transmitted, reproduced
or distributed in any form or medium whatsoever without the permission
of the copyright owner.

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 307-200-1

IBAT School of Management,

KIIT University, Bhubaneswar, India

1-101-2007
th
4 June 2007

The Dynamics of Related Diversification:

The Retail Initiatives in Petroleum Limited
It’s the beginning of the financial year in India, and year of test for
Vardharajan P.K (VPK), head of allied retail business in Petroleum Limited.
He has been at the helm of affairs of the “CoolOne” brand, and has seen the
retail initiatives budding, flowering and fruiting. But this year is expected to
be different with emerging changes in the economic environment of business
and competing petrol stations trying to catch up fast. Besides, a host
competing retail stores have come up in a large number of strategic markets.
In the words of VPK, the retail venture is no more a tree, which is expected
to bear stable fruits, but is a seasonal plant-bed on a kitchen garden. Every
year, the saplings have to be planted, nurtured and nourished to be able to
get that wonderful product in the shape of fresh vegetables. Can VPK make
it happen this year?

The Indian petroleum retailing industry is today poised to make giant strides both in
terms of new forecourt retailing opportunities and superior customer offerings at the
retail outlet. With the onset of the post administered pricing mechanism (APM)
deregulated scenario, the spirit of competitiveness amongst the petroleum companies
augurs well for the consumers, with each of the companies adopting innovative ways
to capture a larger part of the consumers’ mind share. Diversifying into organised
retailing with opening of retail stores at petrol stations, has been natural
diversification for the major downstream oil companies. Despite convergence of
strategic orientations on the part of these oil companies, there appears to be a
stronger focus in Petroleum Limited (PL) towards creating focussed differentiation.
This attracts significant attention owing to its strategic orientation of cost leadership
in its core fuel and oil business.

Prof. Ashok K. Sar prepared this case as the basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation. The case is based on a
successful operating organisation whose name is disguised.

© 2007 IBAT School of Management. No part of this publication may be copied, stored,
transmitted, reproduced or distributed in any form or medium whatsoever without the
permission of the copyright owner.

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Entry:

In 2001, PL had healthy margins, based on the assured 12% post tax return on net-
worth under the APM. However, growth in the fuel and oil business (retail business in
particular) was limited by the retail network expansion norm of the government. In
other words PL had very limited avenues for investment of its surplus cash. During the
late 1990’s when the government was getting ready to deregulate the Indian oil
sector, PL was getting prepared to face the post-deregulation competition. It
upgraded a large number of petrol stations in strategic markets to match the customer
service standards (CSS) of best in class retail outlets. In these petrol stations, it
created additional floor space for possible expansion of conventional lubricants and
after market products. It also took the petrol station owners, (known as dealers)
through a series of training and development experiences, thereby creating a pool of
smart and professional dealers who understood the external environment, the
resource requirements for success and the required processes. However there were
not enough business opportunities from the natural growth in fuel and lubricants
business to exploit these strengths, viz., financial resources, physical facilities at the
retail outlets and the dealership abilities. Diversifying into the organised retailing was
a natural option, taking cue from the international oil majors, who had significant
earnings from the allied retail businesses. The early entry into organised retailing was
also expected to pre-empt rivals. Thus realising the importance of a greater
understanding of consumers’ needs and consistent with its core objective of
continuously adding value to its customers through innovative means, PL has launched
its convenience retailing initiative under the “CoolOne” brand in 2001. It offers a
convenience proposition where a number of typical household errands are aggregated
under one roof for the benefit of the customers. As at beginning of 2007-08, there
were 370 CoolOne stores across India, which bring in unmatched convenience at the
petrol stations. Strategic alliances have been formed with major brand owners and
retailers in the country to further strengthen the convenience proposition. PL is the
2nd largest oil marketing company in the country with over 6000 retail outlets (RO)
spread across the length and breadth of the country. The CoolOne chain of
convenience stores has been set up in the urban, sub-urban and highway markets at
strategically located RO sites with high customer footfalls.

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Industry

The new Indian consumer is now richer, younger and more aspairational in his/ her
needs than ever before. Consumer now value convenience and choice at par with
getting value for their hard earned money. A range of modern retailers are attempting
to serve the needs of the new Indian consumer. The last few years have witnessed an
explosion of organised retail formats like super markets and hyper markets in an
otherwise fragmented Indian retail market.

The retail industry is now estimated at $200 billion. Out of this, organised retailing is
just 3%, i.e., $6.4 billion, which is expected to grow to $23 billion by 2010.

The industry is associated with favourable demographics, characterised by the

following:

• 60% of the population is below 30 years of age.

• Increase in spending power – 50% of cell phone purchases were by under 30 age
group.
• AC Neilson Online Survey 2005 rates India in the highest category of
Aspairational Index in Asia along with China, Indonesia and Thailand.
• Increase in working women population.

Food and grocery account for the maximum percentage share of organised retailing. It
also has the highest growth rates.

The industry is also associated with favourable macro environmental factors such as 7-
8% growth in GDP and associated growth in disposable income.

The operations in India are however at a nascent stage and the key success factors are
going to be the following:

• Excelling in internal processes, viz., supply chain management; private label

management and loss prevention.
• Real estate availability and costs.
• Finance availability and costs
• Availability of quality human resource and costs thereof.

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With the emergence of organised retailing in the country and a growing demand from
consumers for a superior shopping experience, convenience retailing has emerged as a
key business area for petroleum companies given their wide retail presence, existing
customer base and strategically located sites. Convenience need gaps have been felt
in various fields and research has shown that the urban consumer today seeks
convenience in shopping for their basic requirements so that their precious time is
reserved for more fruitful pursuits. Petrol retail outlets provide the right framework
for setting up convenience retail chains where the consumer has the opportunity of
combining shopping with the fuelling occasion.

Petrol stations are widely recognised to be one of the highest traffic aggregators and
retail majors like hypermarkets such as Sainsbury, Tesco and Carrefour have added
motor fuels in their basket of services for the convenience of their customers. Hence
along with strategic locations, the availability of footfall in the petrol retail outlets
gives petroleum retail companies the competitive advantage. Worldwide, petrol
station convenience stores have developed into a serious business in itself with
companies like Shell, Caltex, BP, Exon-Mobil running their convenience store chains
very profitably. All of them have deployed best retail practices in their stores and
offer a wide range of services including laundry, postal services, courier services, fast
food etc.

Synergy

The early mover advantage and exploitation of the three key assets, viz., cash,
physical facilities at the ROs and the entrepreneurial assets of the dealers helped PL
to reap quick benefits. Bulk of the stores started to operate with 50-75% of the
capacity in 3-4 month’s time. However, the competitors caught up fast and in a years
time the other two national oil companies came up with their retail formats at the
petrol stations.

The retail strategy team at PL were getting ready with a set of initiatives to create
strategic assets which would be difficult on the part of the competitors to imitate,
trade or substitute, with a view to earn superior long term profits.

The 1st of the initiatives was the creation of the brand CoolOne. In the beginning, it
appeared a gross miss-number to a majority of the members of the team itself.
However, the core competence of ‘team learning’ which was created over a period of

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ten plus years and got refined in 1996-97 during the organisational restructuring came
very handy in the process of co-creating a vision for the retail initiative, and the
initiatives on the branding in particular. PL already had a loyal customer base for the
fuel and oil products, which was getting managed through the Customer Relationship
Management (CRM) route and reinforced with the introduction of ‘FASTCARD’ (smart
card based transaction processing product). The branding was associated with limited
above the line promotion, but extensive below the line promotion. With the branding,
a substantial portion from the pool of loyal customer was expected to be attracted to
the stores. Although the CoolOne brand has been with reference to the stores, it also
enhanced the customer enrolment for fuel and oil products. The FASTCARD became an
effective tool to keep track of customer enrolments both for the fuel and oil products
and stores.

For obvious reasons, the dealer community focussed their attention on initiatives
which were most rewarding to them. Although PL had created a pool of professional
dealers, their enrolment for the retail initiatives came with question marks, as the
returns in the 1st year was not very encouraging, as large number of competitors’
petrol stations came up with similar stores. Thus it was not easy and straight forward
to have this loyal dealer base to work for the stores. As a part of the allied retail
business (ARB) strategy, dealers were involved in designing in-store promotions,
incentives and a host of other below the line promotional activities. This helped to
enrol dealers and seek their long term commitment. The core competence - skills
associated with understanding complexity and change gained over a period of time
and refined during the organisational restructuring process during 1995-97, helped to
create this strategic asset, i.e., dealer loyalty.

For the fuel and oil business, effective management of inbound and outbound logistics
has been a key competency which has driven PL to success. The same is also
associated with the key success factors of the organised retailing. The challenge was
to share the associated assets with the retail business unit. On examination of the
physical logistics infrastructure, it was found that, except for the IT network, SAP (the
ERP application) in particular, not much interrelationship can be exploited. However,
some of the key people behind the successful management of logistics were enrolled
to design a logistics system for the retail business unit. In about four months, an
effective interrelationship in the areas of IT and logistics was established. The core

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competency of shared vision and team learning helped to create the associated
strategic assets.

The Indian retail industry was notoriously unpopular for its dubious credibility on
quality and quantity of the products and services. There is no dearth of news reports
in the print as well as electronic media of cheating by ROs on quality and quantity. PL
however, had the distinction of having quality and quantity at the top of its marketing
priority. It successfully got to a Quality and Quantity assurance initiative under the
banner Q&Q. This initiative was formalised through an ISO Certification like process,
where individual retail outlets have to get Q&Q certified. For the retail strategists,
the challenge was to share the associate assets with the retail store. Baring a few
standards laid down for Q&Q certification, the remaining ones, was found to be
equally applicable to organised retailing. While no Q&Q certification was proposed,
bulks of the associated processes were used for the retail stores. These processes
were further made a part of the store promotions activities.

Something related to the Quality and Quantity initiatives was the pool of suppliers. On
a 1st cut analysis of the suppliers, it was found that nearly 75% of the suppliers were
common to all petrol station stores and neighbourhood stores. It was felt that, unless
PL has a pool of loyal suppliers, it would not be able to sustain the competitive
advantage. Over a period of time, PL had created a pool of loyal fleet operators for
distribution of its fuel and lubricant products. It had also created a pool of loyal civil,
mechanical and electrical contractors for development and maintenance of its retail
network. These two key supply inputs have been critical to success in fuel and oil
retailing, and PL was considered the number one in these, i.e., most preferred
principal for transporters and contractors. For instance, new PL petrol stations took
the least time to come up, and had the least break-down related closure/ suspension
of sales and least cost of development and maintenance. Similarly, it had least
transportation cost and product dry-outs at petrol stations. The dealer and contractor
loyalty was further captured in the large number of application received for
empanellement. The key to creating this loyal base of contractors and fleet operators
was standardised and transparent operating procedures and assistance for vendor
development. Taking cues from these keys, seeds were shown for creating a base of
loyal suppliers for the retail business. Half of the existing common vendors were more
than willing to have formalised long term associations with PL. And a few more
common suppliers followed shoot. But this exercise took a little longer than expected,

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and in six moths time, 65% of the suppliers were associated in the vendor loyalty
programme. The most excited suppliers were the local grocery suppliers who had
nearly 30% value addition in this process.

In about a year’s time, PL’s retail strategy team was able to put in place resources
and capabilities which remained unique, and hard to copy on the part of either other
stores based at competitor petrol stations or neighbourhood stores. At the end of
2006-07, PL had 370 stores running across India. 75% of the stores are termed as small
stores with around 500 square feed of space and remaining 25% as medium to large
stores with space in the range of 600 – 1200 square feet. Very few stores had space
above 1200 square feet. The growth in customer enrolment and healthy margins has
been indicators of the overall stores’ performance. The gross margins were in the
range of 11-14% and net margins in the range of 2.5 – 4%. “CoolOne” stores have
become the largest organized convenience store retailing chain in the country with a
standardised layout across the country, with a high level of aesthetics and an
ambience aimed at deriving maximum value for alliance partners and offering
consumers a revolutionary solution for attending to their daily chores. They are the
first to open and last to shut in the neighbourhood.

The Offerings:

• It offers a wide range of services viz., ATMs of leading Banks, Music stores from
Planet M and Music World, Beverages from Pepsi, Coffee and snacks from Cafe
Coffee Day and Coffee Day Xpress and a variety of impulse buys including
confectionery, snacks, convenience foods, toiletries and select range of branded
groceries and other FMCG products through exclusive tie-ups with such FMCG
majors like ITC, Cadbury and Frito-Lay.

Implementation:

Initiatives in the retail strategy were mapped in balanced scorecard format as a

strategy map. This captured the interrelationships with reference to the strategic
assets and the core competencies which underpinned the improvement, creation and
fission of the strategic assets. The implementation mechanism was like “front-end
separation and back-end integration”. The strategy map captured the objectives,
measures and initiatives for all key operating personnel. There was a departure from
the conventional coordination by direct supervision through elaborate hierarchy and

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standardisation of work processes to coordination by mutual adjustment. Limited

standardisation was still maintained at the operating core with a view to implement
the standardised offering across stores country wide. Liaison roles were created at the
back-end to take care of the coordination arising out of the “front-end separation and
back-end integration”.

Ownership:

Bulk of the investments in the stores was specific to the stores and had very limited
productivity outside the stores. It was therefore difficult to seek investment from
outside, more particularly owing to perceived hold up problems. Further, it was also
difficult to seek market for the stores in general, at the target rate of return. In other
words, it was rewarding for a dealer to run the store than a third party, as the dealer
had substantial cost advantage over third parties. Besides cost advantage, the dealer
had supporting strategic assets, viz., key manpower, reputation and knowledge about
customers and competitors. Considering these factors, a hybrid structure was
considered to be appropriate to gain cost advantage by chaining and differentiation
advantage by franchising. Under this structure, all fixed facilities, viz., land and
building; furniture and fixtures; air-conditioning and IT equipment were owned by the
company, i.e., PL. The stores pay a license fee, partly fixed (based on the stores size)
and partly variable (based on the throughput) to PL. It was the responsibility of the
dealer to arrange for the working capital for the merchandise, add-ons and other
revenue expenses. The manpower of the stores were on the payroll of the dealers, but
selected by a team comprising of the dealer (or his/ her representative);
representative from PL and an external HR resource person. This structure was also
expected to help in developing organising retailing at the petrol stations in general,
and help to address the intense coordination requirements arising out of the “front-
end separation and back-end integration” in particular.

The Emerging Challenge:

Global retail big wigs like Walmart, Tesco and Coiffeur, and domestic players like
Reliance and Bharati group, are already fancying India’s super hot retail sector. This is
expected to intensify rivalry in major market segments. A basic question arises – what
impact all these entry decisions will have on the competitive position of “CoolOne”?

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Issues for discussions:

1. What is the rationale behind diversification to organised retailing by Petroleum

Limited? From Fuel and Oil to convenience goods?
2. What can be said about the success of the organised retailing venture in the
emerging economic environment of business with world’s top retailing heavy
weights being in the market in the coming 2-3 years?

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